The professional indemnity insurance of many funds management firms leaves them exposed to financial risk if they outsource their administration, according to Consult Insurance Solutions.
"There are not that many administrators, so the contracts are quite restrictive. The most you can recover is about two times annual fees," Consult Insurance Solutions director John Kelly said.
"They outsource operational risk, but retain the financial risk."
The larger companies have more bargaining power, but Kelly said most firms with less than $5 billion in funds under management signed standard outsourcing contracts.
When a fund manager enters into such an agreement, most insurance policies assume the risk is transferred and, therefore, will not cover any losses resulting from mistakes made by the outsourcing partner.
However, insurers often would take on the financial risk retained in an outsourcing agreement at little or no extra cost, Kelly said.
"You can ask your insurer to cover it and they often will, but most fund managers don't know about the financial risk they retain. Most clients have not read the wording to that detail," he said.
"Many smaller fund managers need to save costs and want the cheapest insurance and they are more restrictive in their cover."
